Mortgage Application

Ive_A_Horse_Outside

Hi - hoping someone might be able to help with a quick query. myself and my wife are thinking of buying our first home in the next year or two. we've a trip to thailand coming up soon (all flights and accom pre-paid) but saving for a house deposit continues.

my query is does anyone know if the number of credit cards we have is taken into account by the bank during a mortgage application?

we have 5 different cards for different use (tesco, sainsburys and M+S for shopping; diners card for travel and halifax clarity card for overseas spending with no fees - combined total credit available of approx. 15k). Diners, Halifax, tesco and M+S are rarely used therefore no balance on them and sainsburys one would have about 500/600 a month on it - paid in full each month.

So basically the query is how does this 'look' for a mortgage company? Would they look at it as 'good' financial management that we have the availability of so much credit but do not use it often and are therefore good candidates for a mortgage, or would they look at it as a 'bad' point and risk assess the application accordingly? Would we be better closing a few of the cards that we dont use? Also for info we have no loans/car payments each month, only rent and electric, heating, phone bill etc

Thanks.

Thrugelmir

Close accounts that you have no need of.

Ive_A_Horse_Outside

hi thrugelmir - its not that we have no need for them. they get used sometimes - just not often. if we buy something at M+S for example we use that card to get bonus points.

would a mortgage company look at that unfavourably as opposed to just having and using 1 card?

Thrugelmir

A lender would question ( in their own minds) why you would wish access to a high level of credit i.e. £15k.

orcocan

you can decrease the credit limit if you don't want to close them

redonion

Thrugelmir wrote: »

A lender would question ( in their own minds) why you would wish access to a high level of credit i.e. £15k.

This thread suggests that it depends also on your debt levels:

https://forums.moneysavingexpert.com/discussion/4423571

I have to confess it didn't make clear to me what that dependency is, though. For example, I personally have three cards with a combined credit limit about 1/3 of my gross income, my credit card debt is rarely much over 1/10th of my combined credit limit, and whenever I pay an amount that's not the minimum repayment, I pay it off in full (sometimes I forget and only pay the minimum repayment for a month - silly I know). It sounds like somebody in my position, with a low level of CC debt, is going to benefit from cutting back on level of credit? So what would be a rule of thumb for "reasonable" level of credit, as a function of income and debt? I do understand that it varies significantly across lenders, but a rule of thumb is probably better than nothing!

What I don't begin to understand is: why on earth would cutting back on your existing credit limit make any difference to a mortgage lender? If you CC company trusts you that much, then they trust you that much: asking them to reduce your current limit does not change that. If that historical credit limit info is still available on your credit history - and it is - the prospective mortgage lender knows that either A. you asked the CC company to reduce the limit, so if it came to it, you could put the limit up again and borrow that money on CCs fairly easily or B. the CC company reduced the limit without being asked, in which case presumably you are a worse risk, not a better one. That leads me to ask: what hard reasons do we really have for thinking that reducing your credit limit makes any difference at all?

I believe in another thread somebody suggested that, given some level x of total credit, it's best to have that credit on fewer cards rather than more cards, because that implies trust on the part of the CC company.

redonion

To try and pin this down a tiny bit, here are some concrete rule-of-thumb questions:

total credit available / income ratio: lower is better? Would 0.1 be likely lower than optimal? Would 0.25 be likely higher than optimal?

used credit / available credit: lower is better? Would 0.05 be likely lower than optimal? Would 0.3 be likely higher than optimal? How might "used credit" be defined for this purpose - the total average spend per month, or the average balance after the monthly repayment date has passed (those figures might commonly be say 1000 and 0 respectively, so it makes a big difference)?

Again: I'm quite aware it varies a lot from lender to lender. But I'm hoping there are some vague, fuzzy boundaries that can be put on it...

bowlhead99

- If you have a high balance on credit which won't be cleared on completion the lender will presume you will be making x% payments against it every month of your mortgage which might reduce the total they'll lend, on affordability grounds.

- if you are not using the credit limits, some but not all lenders will consider what would happen if you maxed them all and then had to pay the x% a month against them. Other lenders which are not usually too concerned by this in lower risk situations, may take more notice the more credit there is, especially when they look at it on manual underwriting. So Thrugelmir is right, the ones you don't need could be eliminated.

- However, availability of credit to help you through a temporary shortfall without defaulting on the mortgage is a good thing. You want some credit available and not to be using a high % of your total credit limit.

Before doing an application last year I took my total credit down by a lot, to about half my salary, most of it is unused. I was going to cancel more but then I decided if I get rejected because I have too much spare credit and it's an issue for the lender, I'll just close some at that point. As it's harder to get new credit now compared to 5 years ago, I didn't want to shut down everything. If you lost a job and needed 10k for something, you would rather have 10k credit card space rather than having to apply for a 10k loan or credit card in a situation of being unemployed or facing a crisis.

My application was fine but my numbers, history and status will be different to yours and the lenders don't publicise their models otherwise everyone would share info here and elsewhere and 'game' the system, so it is a bit of a dark art.